March 2002 - Consulting employees

Fred Reichheld is no stranger to this column. As the author of two books on loyalty and its importance to business he has been a consistent advocate of employee involvement at the heart of corporate decision-making.

Catching up with him last week, it was encouraging to hear that his views had not changed. If anything, they are broadening into the area of corporate democracy.

In a world where price, availability and transaction costs have become such important features of the way we do business, Mr Reichheld's interest in such an old-fashioned concept as loyalty seems quaint.

"Most people in business," he says, "take the view that capitalism is based on self-interest and that loyalty is about self-sacrifice. 'How can it have anything to do with business?' they ask. Some managers equate loyalty among employees with a lack of ambition."

Loyalty, he argues, is a tough concept for business. All businesses seem to want it but few go out of their way to get it and when they have it they tend to squander it. Marks and Spencer, the UK retailer, commanded enormous customer loyalty - then threw it away. Mr Reichheld believes the neglect of customer and employee loyalty in the headlong rush to deliver shareholder value has been a big mistake.

Customer and employee loyalty, he says, are closely related but companies have been slow to recognise the connection.

Unfortunately loyalty as a concept has been debased by frequent flyer schemes and supermarket points systems where it is expressed in bonus points redeemable for cash or goods. This is skin-deep gimmick-inspired loyalty, not the loyalty founded on relationships that Mr Reichheld believes is at the heart of good business. To foster this kind of loyalty, he says, it is important to understand the connections from boss to bottom line.

"A loyal employee is someone who puts the interests of customers first," he says. "Employee loyalty is how you get customer loyalty and leadership is how you get employee loyalty."

The problem here, surely, is one of perception. Companies may like their workforces to concentrate their efforts on customers but managers often perceive that their best route to the top is to play office politics and butter up the boss. They have seen how it works for others who spend time servicing their internal network.

The way to avoid this kind of behaviour, says Mr Reichheld, is to tap into customers and colleagues when assessing the performance of an individual. A boss, for example, may expect employees to jump through hoops for customers - but this kind of work is likely to happen out of sight of headquarters. Mr Reichheld's argument is to canvass the views of those who know what is really happening where the work gets done.

At Bain, for example, every month employees are asked a number of questions designed to evaluate the extent to which their team and their boss have reflected the stated values of the consultancy in their work.

"You can't get promoted unless you are in the top half of the scores from these surveys," says Mr Reichheld. "The only people who can get into positions of power at Bain are those that live the values of the company in the eyes of their team."

Other businesses seeking to highlight outstanding work monitor customer feedback. EBay, the internet-based auction and retailing business, uses software programmes and online questionnaires to evaluate customer service. About 60 per cent of employee bonuses depend on the extent to which customers say they have been satisfied by the service.

Any measure that a company links to employee performance and pay, however, must avoid creating distorted responses from employees. Enterprise Rent-A- Car , the largest car rental business in the US, has a philosophy that says: "Put customers first and employees second, and profit will take care of itself."

The slogan sounds surprising for a company that purports to value its employees but Enterprise employees know that their income is linked closely to the profits they generate. This knowledge alone, however, is insufficient to ensure the best customer service.

Some branch managers were concentrating on short-term profits ahead of customer service so Andy Taylor, the chief executive, developed something called the enterprise service quality index.

Customers are contacted by telephone each month and asked to rate their rental experience and their intentions to use Enterprise again. Branch scores on the index are posted alongside profit statements on management reports. Not only this; employees are reminded that no one whose branch has below average scores on the index will be promoted.

This kind of scoring raises the stakes for employee involvement in corporate decision-making. As it is, individual branches of Enterprise Rent-A-Car have considerable autonomy in the way they choose to run their businesses. This suggests that a closer alignment of employee and corporate interests would create a more democratic organisation.

How can corporate democracy develop further? At the revitalised Harley-Davidson, the motorcycle manufacturer, the strategy committee is not selected by the chief executive but elected by the 35 vice-presidents.

If executives face election to office, says Mr Reichheld, they need to concern themselves with aspects of the business beyond their specialist areas. "

"I think we could be seeing the things that are good about democracy and those that are good about capitalism coming together," he says. Is this wishful thinking? Democracy has few supporters in the capitalist system obsessed, as it continues to be, with the idea of a single dictatorial leader supported by a praetorian guard of faithful executives.

When consultants are consulted as closely as they are at Bain, the system begins to look like democracy. When customers vote the bonuses of the staff who serve them, you can see some accountability emerging. And yet these trends will continue to be resisted by those who think management and strategy are only for the board.

We may conclude that loyalty, of a kind, still matters but we should not confuse it with blind obedience. There are different types of loyalty. We may be loyal to an individual, a company, a brand or an ideal. For some people loyalty, like charity, may begin at home. But we should not dismiss it as something that no longer has a place in society.

© 2002 Financial Times Ltd. All rights reserved

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